Brazil facing increased threat of inflation breaching target

Brazil’s central bank said inflationary pressures have spread, increasing the probability that price increases will breach the upper limit of the target range for the first time in a decade.

Policy makers estimate there is a 25% chance inflation will exceed 6.5% in 2013, even after they raised the benchmark interest rate to 8% this year from a record low 7.25%, according to the quarterly inflation report published today. In December, they saw a 14% chance of breaching the inflation ceiling. They forecast the economy will grow 3.1%.

President Dilma Rousseff said yesterday that while the government is attentive to inflation, she opposes measures that will undermine economic expansion. Traders reinforced bets today that the central bank will delay a rate increase until May on a disinflationary global outlook even as it increased its inflation forecast, Newton Rosa, chief economist at SulAmerica Investimentos in Sao Paulo, said by phone.

“The central bank reiterated that faster inflation, despite some isolated factors, is of a more permanent nature, a sign that it needs to raise rates,” Rosa said. “But they do point out several caveats. That shows they will raise rates, but are not in a hurry.”

Swap rates on the contract due in January 2015 fell two basis point to 8.43% as of 10:47 a.m. local time. The real weakened 0.02% to 2.0114 per U.S. dollar.

Swap Rates

The Rousseff administration is trying to recover from two years of slowing growth without stoking inflation that accelerated more than analysts expected in the eight months through February.

The inflation rate climbed to 6.31% in February from 6.15% the month before, compared with the central bank’s target range of 2.5% to 6.5%.

In today’s quarterly inflation report, policy makers said prices will increase 5.8% this year, according to its market scenario, which considers the key rate at 8% and the exchange rate at 2 per dollar by year end. In December, the monetary policy committee, or Copom, said prices would rise 4.9% this year.

While inflation was more disperse and resistant due to seasonal and transportation price pressures, economic activity in mature economies remained weak and commodity prices are expected to fall, the central bank said.

“The Copom considers that the international scenario, despite a marginal improvement, still is an important factor in containing aggregate demand,” the bank said today.

Above Target

The Copom repeated language from the minutes of its March 6 meeting, saying it would monitor the macroeconomic scenario to define the next steps of monetary policy at its April 17 rate decision.

In all its scenarios annual inflation will remain above the mid-point of its target range through the first quarter of 2015, the central bank said.

Policy makers cut the benchmark interest rate to a record in October and have since kept it unchanged. As part of the plan to boost economic growth without stoking inflation, the administration reduced taxes on food and payrolls, and cut energy costs.